Eileen’s husband now receives a trust check every quarter. But the couple, who are both in their 60s, have recently discovered that if he dies before Eileen does, Eileen will not inherit his share. Instead, the $2 million trust will go to the couple’s daughter, who is next in her family.
Eileen will get nothing. “We’re wondering if it would be okay to ask him to split the inheritance if he dies before me,” Eileen, who lives in Albany, NY, asked during a recent episode of The Ramsey Show (1).
But the hosts of The Ramsey Show tell Eileen that asking their daughter to reduce her inheritance feels “wrong.” Here’s what couples can do instead (and what they should have done earlier).
Bloodline trusts, also called dynasty trusts, are used to protect family wealth – especially as blended families become more common. But many people don’t know that these trusts exist or what they really mean for the financial security of the surviving spouse.
While nearly 1.8 million Americans will be divorced by 2023, two-thirds of divorced Americans will remarry, according to an analysis from the Pew Research Center (2). And more than one in five (21.2%) US cohabiting couples have children from a previous relationship, according to US Census Bureau data (3).
The trust ignores the probate process and creditors cannot go after the trust’s assets. A blood trust, in particular, can preserve family wealth for direct descendants (blood lineage), such as children and grandchildren, so the property stays in the family (4).
Once the trustor passes away, the trust becomes irrevocable. In other words, the words are set in stone and cannot be changed in any way.
Bloodline trusts are designed to protect family wealth from, say, a spouse who divorces a direct descendant and remarries. That way, family property cannot be passed on to a new spouse or stepchildren.
However, it also harms the heir’s spouse and other loved ones, simply because they do not share the same blood.
It can also be destructive. For example, if a couple has two children – one is adopted – the ‘reader’ child would inherit the family wealth and the adopted child would get nothing.
Read More: 5 Important Investments You Can Make Once You’ve Saved $50,000
In many countries, the surviving spouse has the right to choose to share the property (usually 30% to 50% of the property) which can be transferred to the will – a law intended to protect the surviving spouse from being left with nothing (5).
But bloodline trusts are structured to avoid this. Many couples, like Eileen, may not realize that they do not have legal rights to the property. And there is nothing her husband can do about it, either. As a beneficiary, he cannot change the trust or name other beneficiaries.
So should they ask their daughter, who is already 24 years old, for a cut – if the situation occurs?
“I personally would feel bad about doing that,” Ramsey teammate Ken Coleman said.
Ideally, the couple should have purchased life insurance long ago to ensure that the surviving spouse will be well taken care of (premiums tend to be more expensive when you buy insurance later in life). Life insurance provides a guaranteed, tax-free death benefit in an immediate (non-rollover) amount.
But, Eileen and her husband were still dependent on the money that will be given to them. Currently, they have about $350,000 in savings, including 401(k)s, with $99,000 left to pay off their mortgage. Both plan to continue working into their 60s.
“Anything you can do in the next seven to 10 years to invest more money, that will help you be more comfortable in your 70s and 80s,” Coleman said.
For example, instead of asking their daughter to reduce her inheritance if her father dies, they can take the amount he already earns every quarter and put it into the account in his wife’s name.
Coleman says their goal should be to invest as much as they can in this stage, which “will become a big part” and give his wife a comfortable break – if she outlives him – without relying on the blood trust of his family.
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The Ramsey Show on YouTube (1); Pew Research Center (2); United States Census Bureau (3); Hope & Will (4); Sallen Law, LLC (5)
This article provides information only and should not be considered advice. Offered without warranty of any kind.
